First shareholder suit. Here's the filing http://www.scribd.com/doc/53362856/kirby-v-sokol
Lot of accusations and fairly typical of this kind of lawsuit. However, this is Warren Buffett and this is Berkshire Hathaway and the subject is governance and insider trading -- this is no ordinary derivative suit. Key points:
> Blames Buffett for failure to act timely to investigate a red flag. "According to information publicly disseminated by Berkshire, Buffett and/or Sokol, Sokol purportedly informed Buffett that he was a Lubrizol stockholder. Again, according to published reports, Buffett failed to inquire further regarding the timing and extent of Sokol’s purchases. Both Sokol’s purchases and Buffett’s failure to act inresponse to Sokol’s admission that he held Lubrizol stock violated Company’s corporate policies.
> Sokol's success in bagging Lubrizol was linked to his status as potential successor. "The financial press credited Sokol with the decision to acquire Lubrizol, and the acquisition was touted as further evidence of Sokol’s potential as Buffett’s potential successor."
> Rating agency concerns about governance are part of basis for lawsuit. "Moody’s Investors Service (“Moody’s”) indicated that these events could result in a negative credit rating for Berkshire. Likewise, Standard & Poor’s (“S&P”) flagged concerns over the Company’s lack of a traditional corporate infrastructure."
> Alleges conspiracy between Buffett and Sokol. The risk to defense here is what information might emerge upon discovery, such as records of phone calls. "Buffett and Sokol, working in concert, breached their duties to Berkshire and its shareholders through these actions and put the Company at risk for a potential adverse SEC action and negative credit rating – events which would be detrimental to the Company. Once the Sokol trades were disclosed, and Sokol resigned from Berkshire, Berkshire’s stock price fell. This immediate stock drop evidences the reputational impairment that Berkshire took as a result of this conduct."
> Attacks independence of company's board of directors to justify why they were not petitioned directly for redress. "The Individual Defendants, because of their inter-related business, professional and personal relationships, have also developed debilitating conflicts of interest that prevent the Board members of the Company from taking the necessary and proper action on behalf of the Company as requested herein. The majority of the Board, including the defendants listed below, are subject to the following prejudicial entanglements and transactions which compromise their independence." See link above, but the filing essentially accuses Buffett, Steve Burke, Howard Buffett, Bill Gates, Charlotte Guyman, Charlie Munger, Tom Murphy, Ron Olson, Sandy Gottesman and Walter Scott of not being independent directors. (Of these, Berkshire classifies all as independent except Buffett, Munger and Olson under NYSE/SOX rules.) Only Sue Decker is not accused of having a conflict of interest of some sort. To describe conflicts the lawsuit delves into friendships, such as Guyman, who is friend/yoga buddy of Melinda Gates.
NOTE: As far as I can tell, Delaware case law acknowledges that friendships and outside business relationships could affect director independence, but is not settled on how much proof is required of their influence. In re Oracle Corp. Derivative Litigation found that the question of independence turns on whether a director is, for any substantial reason, "incapable of making a decision with only the best interests of the corporation in mind." This could include the existence of "personal or other relationships" with the interested party. In contrast, in Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 2004 WL 739152 (Del. Supr. 2004), the Delaware Supreme Court ruled that “[a]llegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director’s independence" and that the plaintiff bears the burden of proof to show that independence was compromised, not just point out relationships suggesting that it might be compromised.
> "Sokol and Buffett, in failing to consult the Audit Committee, breached the Company’s Code [of Conduct]. Buffett also chose to turn a blind eye to Sokol’s holdings and failed to investigate the nature and extent of Sokol’s trades [in breach of fiduciary duty]." ..."Sokol’s trades and Buffett’s failure to fully inform himself about these trades are in direct violation of the Company’s Policy and amount to a breach of the duty of loyalty and due care owed to Berkshire and its shareholders."
> Questions whether Berkshire board was informed. "On March 13, 2011, Berkshire’s Board convened a special meeting to consider the proposed acquisition of Lubrizol. The Company’s Board unanimously approved the merger agreement. There is no indication that any member of Berkshire’s Board questioned Sokol’s holdings in Lubrizol or any potential conflicts of interest. In fact, there is no indication that Buffett informed the Board of Sokol’s Lubrizol holdings."
> Complains that shareholders will have to bear the cost of the SEC investigation (which probably will far exceed the $3 million earned by Sokol from the trades).